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European and US equity markets were mixed for much of yesterday’s trade. Nevertheless, most of the European majors managed to close out in positive territory even if investors seemed a touch wary of the post-Trump equity market rally.

The stock rotation since last week’s election has continued, although the pace has slowed. The worst performing sectors include technology, consumer staples and utilities. Meanwhile, financials and US small caps have done well. Yet the outlook for US multinationals is mixed. On one hand, the strong dollar looks set to impact negatively on US multinationals as it makes US goods more expensive for foreign buyers. Not only should overseas sales be lower, but earnings will also be disappointing once converted back into US dollars. On the flipside, investors are considering the possible effects of a one-off reduction on US corporate tax repatriations. Back in 2004, Congress allowed multinationals to repatriate foreign profits to the US at a 5.25% tax rate. Mr Trump has proposed giving companies a one-off deal to pay a 10% tax to repatriate overseas earnings. Capital Economics calculates that this could amount to the return of around $2.5 trillion in foreign profits currently lodged outside the US. This is on top of his proposal to reduce the corporate tax rate to 15% from the current 35%. When an analysis was carried out on the 2004 repatriations, it discovered that the vast majority of the returned profits were divested to shareholders or used to buy back stock. While this is obviously positive for the stock market, it looks like a lost opportunity when considering future investment.

The FTSE 100 ended the day 39.6 points higher at 6,792.7

The German DAX rose 41.5 points or 0.4% to end the day at 10,735.1

The US30 closed 54.4 points higher to finish at 18,923.1 The S&P 500 ended up 0.75 % at 2,180.4 while the Nasdaq 100 rose 1.3% to close at 4,764.5

Equities

It was the mining sector’s turn to take a tumble yesterday. Base metals such as copper, aluminium and zinc pulled back from the highs which followed on from Donald Trump’s unexpected victory in the US presidential election. Base metals had shot higher as investors piled in on hopes that Mr Trump’s pre-election promises on infrastructure spending would lead to increased demand for raw materials as construction projects were given the green light. However, it looks as if the initial euphoria may have been overdone and reality is creeping back in. Anglo American (AAL), Antofagasta (ANTO), BHP Billiton (BHP) and Rio Tinto (RIO) ended between 6.7% and 4.5% lower yesterday.

Commodities Update

WTI and Brent crude both flew higher yesterday, after hitting multi-month intra-day lows on Monday. Both contracts have fallen sharply since early October after failing to break convincingly above the highs hit back in June. The sell-off came as traders and investors began to question the willingness and ability of OPEC members to stick to their commitment to cut output. At the end of September the cartel took the markets by surprise by announcing a coordinated plan to reduce production. However, there were few details in the initial declaration which was made during the International Energy Forum meeting in Algeria. Instead, OPEC said they had set up a working group which would hammer out details concerning output quotas for individual members alongside specifics about ensuring compliance. However, since then a number of major OPEC producers have come up with reasons why they shouldn’t be included in any deal to limit production. Iran has cited the need to boost production following years of sanctions which only ended earlier this year. Meanwhile Iraq, Nigeria and Libya have all requested exemptions as they struggle with hostile disruptions to their respective oil industries. News of an attack on a major oil pipeline in Nigeria, the Nembe Creek Trunk Line in the southern Niger Delta, gave an additional push to prices yesterday.

Given the size of its recent sell-off, crude is probably overdue a corrective bounce. However, neither Brent nor WTI is trading near significant support. The two contracts have bounced off $44/44.50 and $43 respectively and it could be that these levels build as support. But it could be that both contracts need to retest their lows from early August. This would imply a move down to $40 and $42 for WTI and Brent respectively.

Gold and silver recovered modestly in early trade yesterday. The pick-ups came despite further dollar strength which saw the Dollar Index once again break above the 100 level. The area around here has acted as resistance on a number of occasions over the last two years. Now traders are watching to see if the current upside momentum is strong enough to push the basket up through this level decisively. Typically, dollar-denominated commodities (such as gold and silver) struggle when the greenback is rising. This is because a stronger dollar makes it more expensive for non-dollar holders to convert their currencies prior to purchasing dollar-denominated commodities. So, it can be a positive sign if gold and silver make gains despite dollar strength.

However, the dramatic sell-off over the last week has done considerable damage to the technical set-ups for both gold and silver. It’s worth bearing in mind that buyers of the two precious metals had only just rebuilt some confidence following the sharp sell-off at the beginning of October. Ironically, last month’s slump was triggered by the disclosure of a video tape which appeared to damage Trump’s chances of winning the presidency. This led to a substantial poll lead for Clinton, along with a dollar rally as investors banked on a Clinton win, business as usual and a December Fed rate hike. This time round, the precious metals rally which greeted Trump’s victory suddenly reversed as investors considered just how inflationary his policies could be. Ultimately, an inflationary environment should prove positive for gold and silver. But for now, all everyone is concerned about is the prospect of higher rates and a strong dollar.

So far, gold has managed to hang on above $1,220 on a closing basis. This roughly marks the 50% retracement of the December 2015-July 2016 rally. Silver looks even more precarious with the first area of significant support coming in around $16.

Forex Update

The US dollar continues to hover around highs last seen just under a year ago. On Monday the Dollar Index broke above 100 for the first time since the beginning of December while the EURUSD closed out at its lowest level since 2nd December. That was just before a European Central Bank (ECB) meeting when Mario Draghi failed to deliver on expected fiscal stimulus. Markets had anticipated looser monetary policy from the ECB with an expansion of quantitative easing and a further lowering of key interest rates.

Yesterday the dollar pushed higher again. The Dollar Index continued to trade around 100 - a level which marks the top of a trading range which has held since the spring of 2015. The greenback was supported by some decent US data. Core Retail Sales (excluding autos) rose 0.8% in October which was better than the +0.5% expected. Retail sales were also up 0.8% when autos were included. However, this was below the prior month’s reading of +1.0%. Meanwhile import prices were up 0.5%, which was better than expected as was the November update on the New York manufacturing index.

Sterling fell sharply following the release of UK inflation data for October. Year-on-year CPI rose 0.9% which was a touch below both the prior month’s reading of +1.0% and the consensus expectation of a rise of 1.1%. Core CPI (which excludes fuel and energy) rose 1.2% in October when compared with the same time last year - well below September’s +1.5%. Both numbers were pushed lower by falls in clothing and tuition fees. Traders dumped sterling as the overriding view was that the pull-back in inflation may well encourage the Bank of England’s (BoE) Monetary Policy Committee (MPC) to revisit the promise made in early August to cut rates further before the year-end.

Later on, BoE Governor Mark Carney and other MPC members faced a Treasury Select Committee during Inflation Report hearings. Mr Carney said the MPC would maintain a “neutral bias” on forward guidance amid uncertainty over the government’s negotiating position on leaving the European Union. However, the Treasury Committee chairman Andrew Tyrie shot back saying : “the guidance is that there isn’t any”.

Upcoming events

Today’s key economic data releases and events include a panel discussion at the Union Bank of Switzerland's European Conference 2016, in London entitled "Monetary Policy after Quantitative Easing: Helicopter Money or Bank to Raising Rates?” The panel includes Federal Reserve Bank of St. Louis President James Bullard. We also have the latest update on UK unemployment including the Claimant Count Change. From the US we have PPI, Capacity Utilisation, Industrial Production and Crude Oil Inventories.

Disclaimer:

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